Ofsted complaints stall nursery sales

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Problems with complaint-driven Ofsted inspections stymied providers’ plans to sell their settings or acquire new ones in what was otherwise a positive 2013 for the nursery sector, according to a specialist property adviser.

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Christie + Co’s Business Outlook 2014 reports that the nursery sector ‘continued to attract suitors during 2013’ but that many operators were hindered by ‘continuing struggles with inspections’.

The company's director of childcare Courteney Donaldson says, ‘The increase in complaint-triggered inspections has created some uncertainty for nursery businesses, as going from Outstanding to Inadequate, or even Satisfactory, can have an affect on a nursery’s occupancy and revenue. Ultimately this could influence the price that a purchaser may be willing to pay, and in some cases a bank or investor's perception of the business, in terms of risk.

'As a result, some downgraded providers had to change their business sale strategies, while matters were addressed, in order to mitigate any concerns that purchasers may have had about the impact of the "downgrading" on the longer term performance of the business. This was particularly the case for those businesses at risk of losing free entitlement funding.'

Last year saw a sharp rise in complaint-driven inspections. While 118 childcare providers were inspected following complaints in September 2012, the figure rose to a high of 788 in April 2013, and in the four months to July last year, the rate was between 600 and 700 a month. Of the nurseries and childminders inspected following a complaint, nearly a third saw their grade drop, according to figures released by Ofsted last October.

As to the trend in 2014, Ms Donaldson adds, ‘There have been a lot of useful conversations with Ofsted and hopefully Ofsted are listening but it’s difficult to forecast what will happen this year.’

‘Corporate acquirers’ and ‘cash-rich and experienced buyers’ were the main purchasers of nurseries last year, which saw a number of major sales of nursery chains, most notably the acquisition of Busy Bees by Ontario Teachers Pension Fund and Bright Horizons’ purchase of kidsunlimited.

Ms Donaldson says, ‘During 2013, it was clearly evident, from first-time purchasers to seasoned acquirers alike, banks were far more comfortable supporting and facilitating acquisition funds to purchasers that had the ability to provide large cash deposits.'

In 2014, Christie + Co is predicting increased activity across the regions, particularly amongst regional groups. ‘For many years, buyer demand for nurseries in London and the South East has outstripped supply,' says Ms Donaldson. 'With quality opportunities remaining few and far between, the focus of buyers is beginning to shift toward regional acquisition and organic growth opportunities.

‘During 2014 we fully expect to see an increase in regional sales. Regional nursery groups, and owners of high-quality single asset nurseries, will undoubtedly receive direct approaches from buyers seeking confidential off market deals via negotiations in non-competitive environments.’

  SUMMARY: MARKET PREDICTIONS

  • ‘We are likely to witness an increase in sales of regional nursery groups’
  • ‘Paralleled with improving confidence amongst banks and investors, we anticipate increased demand from buyers’
  • ‘Demand will remain for businesses that provide specialist care and education for children with complex needs’
  • ‘The nursery ratio issue could raise its head again’
  • ‘Ahead of the 2015 Election, some parties’ proposals to increase free entitlement will be subject to much debate among providers, particularly in respect of funding and deliverability’